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Is Microsoft a Victim of Its Own Success?

Steve "Microsoft" Ballmer

Don’t blame Steve, this is something he couldn’t foresee

One of the most popular memes zipping through the internet lately is whether Microsoft is having a lost decade. A little background on that phrase lost decade. That phrase is most commonly associated with the economy of Japan in the 1980s. Japan looked like it was threatening to take over the global economy. It just looked that unstoppable. Japanese cars littered the streets. Japanese products were in the hands of the majority of American consumers. The Japanese corporate brand just looked like it was going places that America’s fabled industrial brands could not. Japan looked unstoppable, it looked unbeatable and it looked like the future. When we look at the picture now, we can see how wrong that perception was.

The reason being one primary reason things did not turn out the way they looked like they were going to turn out was because Japan had a “lost decade.” This began with the massive stock and real estate bubble bursting in Japan. For the longest time, it looks like Japan has never really fully recovered from that bust. It is this long deflation that has managed to cripple the Japanese economy and its growth has remained stagnant ever since. Many of the tech commentators from established magazines and also an increasing number of tech blogs are saying that Microsoft, once the seemingly invincible and unbeatable giant of the American technology landscape, is experiencing its own lost decade.

Primarily, many of this hand wringing is expressed by people who track or professionally manage Microsoft stock. If you were lucky enough to buy Microsoft’s stock back when it launched in the mid 80′s, even for a small amount of money, chances are high that you would be much richer now, if not a millionaire even with a small amount of stock. That is how powerful and amazing Microsoft stock was. Starting a decade ago, that is no longer the case. In fact, Microsoft stock has languished in the mid 20s to low 30s level for what seems to many investors an unbearably long time. We are talking close to a decade of stock prize stagnation. This has given rise to many concerns of servers of Microsoft if it has lost its position as the quintessential shot color in the technology space. Some have even accused the software giant from Redmond, Washington, as a “me too” company. It means that somebody innovated a new product category and then Microsoft comes up with its own version and said “me too.”

There are many ways to interpret this criticism. It is not up for argument that yes, Microsoft in terms of revenues makes less money than Apple. In fact, just one Apple product, the iPhone, brings in more sales revenue than all of Microsoft. That would just be truly unbelievable 10 years ago. We are talking Microsoft here like the owner of the platform that most computers on the planet need to run, but that is the reality. Those are the hard numbers. That is just the iPhone product line. Apple in sheer numbers based on its other product lines completely buries Microsoft. It is not surprising people are basically running around and saying, “Why did this happen?” It used to be that Microsoft was a safe stock bet. It is one of those blue chips stocks that you buy and after a couple of years, when you are ready to retire, you will be pleasantly surprised that it has appreciated so much that you can retire, that it was money well invested. In the span of 10 years, including the time Bill Gates left active management of the company to Steve Ballmer, Microsoft has lost its dominant position.

One of the ways to interpret this is that it is strictly a victim of its own success, that the “me too” criticism leveled against the company is not really valid because to some extent Microsoft has always been a “me too” company. That is one of the oldest criticisms against Microsoft, an innovating software company that come up with a new product creating a new category. Microsoft being the owner of the platform of the whole software industry and really the backbone of corporate computing would effectively in so many words say to the large industrial buyers of a potentially new innovative product. Look, we are coming up with our own version or we see the opportunity in this space and we are coming up with our own product for the disc space. The end result of that pronouncement is that the big buyers would hold off and not buy the innovative software company’s product or buy less of it and wait for Microsoft’s product.

This is called network effect. This has been studied to death in the past. Many people in the past have said this was unfair, but that was the reality. The network effect worked to Microsoft’s favor and that is why it was able to just branch out methodically but unstoppably from just being the maker of the operating system to productivity software, to certain parts of the creative software, to network software. A lot of industry observers in the past were saying that Microsoft was like the Star Trek’s board. It was just completely unstoppable. What happened? Well it is not so much a failure on Ballmer’s part. What changed is that the market has changed. Microsoft could not use its network effect or market dominance to elbow its way into these new areas like social media, dominated by Facbook, search engines dominated by Google and now mobile computing which is co-dominated by Apple and Google.

The old rules of saying, “Hey, everybody wait we are coming up with our own product for this space. Check out what we have to offer “no longer works. Some observers are saying it is because Microsoft misread the fact that consumers are looking for the “cool factor.” That is why they are drawn to Apple products. To a fairly shallow level, this is accurate, but it is deeper than that. The bigger reality is that Microsoft was structurally unable to leverage its weight in the software side of the equation of the soft industry to hardware reality in a fast moving and fast growing space. That is why it got shut out of the portable music space that is dominated by the iPod. It missed the boat on smart phones dominated by Android and iPhone. It got shot out of the tablet space which was popularized by Steve Jobs and dominated by Apple.

In a very real sense, if framed from this traditional core strength of the network effect, Microsoft was a victim of its own success. If you are a huge monolithic bureaucratic corporation used to having your way because you plated the same formula over and over again, and all of a sudden all this new market started popping up and because of the internet, consumer tastes are more fleeting and fast moving. Also branding reputation moves much more faster and more elusive. It is hard to compete and it is hard to use that same old strength competitive advantage in the past to apply it to a really fast moving target, and that is why Microsoft had a lost decade. The real question is would Microsoft regain some of its previous dominance in post-Microsoft world with the launch of Windows 8? That is the $64-million question and you better believe shareholders are going to be looking at the numbers closely for several quarters after Windows 8 launches.